Tesco PLC (LON:TSCO) may be making headway against the aggressive discounters of the food retail sector, but 11% rise in the share prices is probably a little over-cooked for the analysts polled by Proactive Investors.
The pension deficit and the company’s net debt rang alarm bells.
The former first: Tesco’s retirement liabilities have ballooned by £3.2bn to £5.9bn because of lower bond yields, meaning the company may have to dig behind the sofa to find more cash to put in the pot.
According to Societe Generale the increase in the pension deficit could have a 43p a share “negative impact” on Tesco’s valuation. It rates the stock a ‘sell’ down to 130p.
The net debt, while down £758mln from a year ago, was £4.4bn. However the company’s “total indebtedness” is a rather more worrying £18bn.
“If Tesco's profit and loss [account] stopped at the operating line then we feel pretty convinced that we would be much more sanguine on the group's shares,” said Shore Capital’s veteran retail analyst Clive Black.
“That progress is being made at the operating level is undeniable and commendable.
“However, such progress is not enough for us to be positive due to the net debt, the operating leverage, a variable raised by the company itself, and the aforementioned pension deficit.”
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Black rates the shares ‘hold’ and has a target price of 189p.
Tesco’s day-to-day performance impressed – underlying sales growth was better than expected, and it set some realistic targets for improving operating margins.
The shares, up 22% in the last month, added a further 21p to move to 209.6p.
The consensus valuation, based on the target prices supplied by 15 brokers, is 192.22p. This suggests the current share price is marginally out of whack with reality.
American broker Jefferies says the current market worth reflected “the potential for a domestic recovery”.
“Further upside (beyond today's likely strong move) requires a more positive inflection in industry dynamics,” it added.
Tesco said the all-important UK like-for-like revenues grew by 0.6% in the six months to August 27. That represents the third straight quarter of growth.
Volumes were up 2.1% and transactions were ahead 1.6%, which means Tesco cut prices to kick-start growth. In fact Tesco said prices had fallen 6% over the last two years.
Group underlying sales grew by 1%.
The improvements leave the grocer “well placed” to achieve £1.2bn of operating profit for the full-year. In the six months the figure was £596mln on turnover of £24.4bn.
CEO Lewis and the team wants to rebuild operating margins to 3.5-4% by 2019/20 by implementing £1.5bn of further cost cuts.
"We have made further strong progress in the first half, with positive like-for-like sales growth across all parts of the group as we re-invest in our customer offer whilst rebuilding profitability in a sustainable way,” the Tesco boss added.